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Paying With a Credit Card Makes You Spend More Money

July 27, 2018

Written byAnnie Hartman

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When you're a kid, a library card is a magical item that can bring you seemingly unlimited access to joy and wonder. For many adults, that's what a credit card does. People like to say it's not good to carry a lot of cash around, but cards have their drawbacks, too. What if keeping an empty wallet is emptying your bank account?

Pick a Card, Any Card

Sure, using a credit card can be great. You don't have to carry as much cash around, keeping track of your spending is easier, and credit cards even help you save money. But studies show that cards can also lead you to spend more than you would have with cash.

In 2001, MIT researchers Drazen Prelec and Duncan Simester gave business students a chance to bid on three items: a pair of tickets to a sold-out game between the Boston Celtics and the Miami Heat, a pair of regular-season Red Sox tickets, and a consolation prize of one Celtics and one Red Sox banner. The students were asked to indicate how much they were willing to pay for each item, with the understanding that the person with the highest bid would get to purchase the item for the price of the second-highest bid. They got no information about the original price or the typical market value to eliminate any outside influence. The only difference between the bidders? Some were told the payment had to be made in cash; others were told it had to be made by credit card.

It turns out that the students were willing to pay 83 percent more on average when paying with a credit card than when paying in cash — and more than twice as much, in some cases. In a second study, simply exposing students to a credit card logo was enough for them to bid more for a gift certificate. That shows that the amount you're willing to pay in cash isn't about how much cash you have on hand. There seems to be something intrinsic to credit cards that makes you willing to pay more.

Swipe Right

But why do credit cards make you pay more? Marketing professors Promothesh Chatterjee and Randall Rose wondered if it was because paying with a credit card actually changes the way you perceive products. Their hypothesis was that credit cards make you focus on a product's benefits while cash makes you focus on its cost. A study they published in 2011 in the Journal of Consumer Research showed that hunch was correct.

Before starting the experiment, the researchers used a sentence-unscrambling task to prime participants to think about either credit cards or cash: Half of them got credit-card words like "Visa," half got cash words like "ATM." Next, they saw a picture of a camera, along with a list of details about its benefits and its costs, then they were asked to recall as many of those details as possible. Those primed to think about credit cards made significantly more recall errors about the cost attributes than the cash-primed participants.

Of course, increased spending can be a good thing if you're on the other side of the equation, like a waiter at a restaurant. Studies show that even the presence of a credit-card logo on a check tray leads to higher tips, even if a guest is tipping in cash.

Mind Over Money

Why is this? When you pay with cash, you're physically giving up a handful of bills, so you're forced to think about the amount. But it's all too easy to mindlessly swipe your card when an amount is just a number, and you have until the end of the month to deal with your spending.